Proof That Government Development Aid Doesn’t Produce Economic Growth

Monday, October 19, 2015

One of the big questions in both politics and economics is whether government development aid actually produces economic growth in the recipient countries. There’s arguments either way of course: we could assume that poverty is the absence of the economic resources to produce the investment that leads to growth. We do rather assume this in the rich country economies after all: some capital is necessary to get a new business up and running to the point where it will contribute to the future increase in general wealth. So, maybe this is what ails the poor countries? At which point, given that many people think it’s a bit unfair that some parts of the world are so much richer than others then why shouldn’t some of the wealth be sent to the poverty?

We can also argue it the other way around. Assume, as many do, that economic development is reliant upon the institutions in an economy. Things like the rule of law and so on. And we only accept the presence of government either because they provide those things for us or they kill enough of us that we’ll accept their oppression. But they’ll only produce such public goods, the governors, if they have to. And aid might mean that they don’t have to: enough income might flow into government coffers to buy those essential Mercedes for the mistresses that government doesn’t need to tax the populace. At which point we’re not worrying very much about the governors as we’re not paying for them. This of course being a major argument from Angus Deaton, the recent economics Laureate.

Do note that this is all about development aid: this is not, at all, about emergency aid.

So, we’d really like to know whether this direct and official government aid actually does grow the economy or not. And there’s an interesting new paper giving us an answer.

Their first finding is that politically motivated aid does not produce economic growth: